The FTSE 100 hit a low of 3,512 on 3 March 2009. Since then, it's soared 56%...
First, we had the credit crunch, which froze inter-bank lending in August 2007. Then the UK entered its first recession since 1991, with our economy shrinking in the second half of 2008.
Then came the inevitable market collapse, as bearish sentiment plunged the FTSE 100 to a low of 3,512 on 3 March 2009. At the bottom of the previous Noughties bear market, the Footsie closed at 3,287 on 12 March 2003, so it added a measly 225 points in nearly six years. Yikes.
Up 60% in a year
Of course, the best time to buy is at the point of maximum pessimism: "when there's blood in the streets". With the benefit of hindsight, a year ago today was a fantastic time to pile into equities.
As I write, the FTSE 100 stands at 5,472, up 56% on its closing level of a year ago. Add in almost 4% for dividends and you're looking at a total return of 60% in 365 days. This exceptional return is surely unrepeatable for many years, if not decades. From my knowledge, the last time UK equities underwent such a steep rally was in 1975, when I was still in primary school.
It's not just the mega caps in the FTSE 100 that have had a bumper twelve months. Indeed, smaller companies have done even better:
Twelve months of tremendous returns
| Index | Close
03/03/09 | Close
02/03/10 | Gain (%) |
|---|
| FTSE 100 | 3,512.10 | 5,484.10 | 56.1 |
| FTSE 250 | 5,850.73 | 9,598.65 | 64.1 |
| FTSE 350 | 1,825.42 | 2,867.05 | 57.1 |
| FTSE All-Share | 1,781.64 | 2,803.58 | 57.4 |
| FTSE SmallCap Index | 1,646.56 | 2,839.14 | 72.4 |
| FTSE Fledgling Index | 2,338.39 | 4,089.01 | 74.9 |
| FTSE AIM All-Share Index | 378.29 | 678.46 | 79.3 |
The FTSE Fledgling Index (which covers companies too small to be included in the FTSE All-Share Index) has returned 75% in a year. Likewise, there were rich pickings to be had in the Alternative Investment Market, with the FTSE AIM All-Share Index rocketing nearly 80%.
Thus, the number-one strategy for bumper returns over the past year would have been to dive deep into small-cap companies. However, there is a price to pay for these additional returns, in the form of liquidity risk. While it may be easy to get into a small-cap, getting out can be much more difficult, especially during thin trading.
Thus, if investors lose their appetite for riskier assets, then small-caps could well be the first to suffer in any market downturn. Indeed, smaller companies fell more heavily in the 2007-2009 downturn -- so their greater gains in the last twelve months need to be seen in this light.
It won't last
Of course, all rallies have to end sometime. High consumer and government debt, plus the end of quantitative easing, could mean any decent profit growth in the next year or two will be an uphill struggle.
In fact, there are some who argue that the past 12 months do not amount to the start of a new bull market for equities. These bears say that, in fact, the past year has been but a secular bull rally in a long-term bear market, pointing out that the FTSE 100 first reached today's level way back in January 1998.
Whether the bears are right or not, I don't think there is much doubt we can expect much more subdued returns over the coming 12 months. The UK market now yields 3.3% and sits on a forward P/E ratio of around 13 times. While it's clearly not very expensive, it's not that cheap either!
More from Cliff D'Arcy:
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